CONVENING and conducting a meeting of directors of a company is often mistakenly seen as a trivial part of the business transaction yet failure to conduct the same in terms of the law has serious legal consequences.
In this article, the author discusses the issue of failure to give proper notice of a board meeting to all directors of a company and the consequences thereto.
Background
A board of directors (“the board”) is a group of people appointed to manage and run a company. The Companies and Other Business Entities Act [Chapter 24:31] (hereafter “the Act”) empowers the board to make decisions for the company on all matters except those reserved to the shareholders.
The board’s responsibilities include inter alia determining and directing overall business performance and strategy plans. These powers are exercised subject to the Act and the company’s constitutive documents.
All powers vested in directors are exercisable by them collectively, acting together, by passing resolutions at board meetings. The general rule is that directors can only act validly when assembled at a board meeting.
This position was confirmed by the Supreme Court in Madzivire & Ors v Zvarivadza & Ors, 2006 (1) ZLR 514 (S) and followed in Cassandra Myburgh and Anor v Adlecraft Investments (Private) Limited SC-118-22.
It follows that a company, as a legal person, speaks to no one except through its directors, not individually but collectively. This is through resolutions that they pass when they are assembled in one room to transact the business of the company.
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An exception to this general rule is when a company has only one director, who can perform all judicial acts without holding a full meeting. For example, a private company with one shareholder may have a sole director.
Notices of board meetings
Board meetings are an internal matter, which is primarily governed by the company’s constitutive documents. Any director may call a board meeting by giving notice of the meeting to all the directors or by authorising the company secretary to give such notice.
Section 198 of the Act provides that the company secretary as the custodian of the company’s records should ensure that notices of all shareholder meetings, board meetings and board committee meetings are given in terms of the Act; and ensure that minutes of all such meetings are recorded.
Subject to the provisions of the Act and the company’s constitutive documents, a notice of a board meeting need not be in writing.
However, it is highly commendable to give written notice since proof of service of the same to all directors is required and should be kept.
The general rule is that notice of any board meeting must indicate its proposed date and time; where it is to take place; and if it is anticipated that directors participating in the meeting will not be in the same place, how it is proposed that they should communicate with each other during the meeting.
The purpose of the notice is to enable each director to know what is proposed to be done at the meeting so that he/she can decide to either attend or not. The requirement for reasonable notice is an important part of good corporate governance.
There is a public interest in majority directors not being permitted to call meetings at unreasonably short notice, in the absence of objective urgency, where directors and shareholders are at loggerheads.
Consequently, to facilitate collective decisions of all directors at a meeting, notice must be given to every person whose name appears as a director on the CR6 form filed with the Companies Office.
The general rule is that to constitute a valid meeting of directors, fair and reasonable notice of a board meeting must be given to every director, who is within reach. This position was stressed by Smith J in the case of James North (Zimbabwe) (Pvt) Ltd &Ors v Mattinson 1989 (1) ZLR 322 (HC) and confirmed by the Supreme Court in its recent ex tempore judgment in Broadway Investments (Pvt) Ltd and 2 Ors v Chidawu SC-16-24.
The question of whether a director is within reach depends upon the circumstances, including the nature of the business to be transacted. If the business to be transacted is contentious, the degree of inaccessibility would have to be immense.
If, on the other hand, the business is not contentious but requires immediate attention, the degree of inaccessibility would be very much less, particularly where the absent director knew and approved of the formal business to be transacted.
Further, it should be noted that fair and reasonable notice depends on the circumstances and the structure, practice, and affairs of the company.
It suffices to also note that notice must be given even to a director who has ceased to attend to the business of the company so long the person has not formally resigned or been properly removed and is within reach.
While section 202(3) of the Act provides that a director may resign at any time by giving written notice to the board or its chairperson, section 217(7) of the Act places an onus on that director, who has resigned to notify the company and the Registrar of the Companies and Other Business Entities of the fact of his/her resignation.
The effect of failure to comply with section 217(7) is that the director is still bound by the duties as a director of the company as if he/she has not resigned.
In the absence of proof that when he/she resigned he/she notified the company and the Registrar, he/she is deemed to be a director of the company.
Thus, to avoid an absentee director from being deemed to be a director, the company may consider removing him/her properly from office in terms of section 202 of the Act.
It should also be noted that notice need not be given to directors, who waive their entitlement to notice of that meeting.
Legal consequences
In James North (Zimbabwe) (Pvt) Ltd & Ors v Mattinson case supra, the court held that failure to give notice, even though not mala fide would be a ground for holding that a meeting was not a valid meeting of directors.
Unless a board meeting is properly convened, in the absence of waiver and ratification by all the directors, the notices are a legal nullity.
This is particularly so since the general rule is that an irregularity regarding the convening of proceedings at a board meeting will render invalid resolutions passed at the meeting.
It follows that failure to notify a director renders the meeting and purported board resolutions null. Thus, any decision purportedly made under a resolution pronounced at a meeting not properly convened is null and void and of no force and effect.
As was pointed out by Lord Denning in Macfoy v United Africa Company Limited (1961) 3 All ER 1169 (PC) at 1172: “If an act is void, then it is in law a nullity. It is not only bad but incurably bad. And every proceeding which is founded on it is also bad and incurably bad.”
Further, failure to give reasonable notice constitutes a breach of fiduciary duties by the company secretary and the director(s) requisitioning the meeting.
Consequently, a director may be held liable under the principles of the common law relating to a breach of fiduciary duty, for any loss, damages or costs sustained by the company because of any breach by the director of a duty of care and business judgment rule and duty of loyalty. (See, section 197 of the Act.)
In conclusion, meetings of directors should be properly convened by notifying all the directors since failure to do the same constitutes a breach of fiduciary duties by the company secretary and the director(s) requisitioning the meeting and may also constitute an irregularity, which renders invalid resolutions passed at that meeting.
- Mafongoya and Kambo are duly registered legal practitioners. Disclaimer: This article represents the views of the authors only and does not intend to give any kind of legal opinion on any matter. — [email protected] or [email protected]. These weekly New Horizon articles, published in the Zimbabwe Independent, are coordinated by Lovemore Kadenge, an independent consultant, managing consultant of Zawale Consultants (Pvt) Ltd, past president of the Zimbabwe Economics Society and past president of the Chartered Governance & Accountancy Institute in Zimbabwe (CGI Zimbabwe). — [email protected] or mobile: +263 772 382 852.
